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Russian Software Makers Search for Growth

In the Russian software world, bigger is better, and at the Russoft conference in Moscow, software makers seek tips on how to become bigger, better companies.

MOSCOW, Russian Federation—In the global software jungle, it doesnt help to be small. Despite growing at 30 percent per year in many cases, Russian software makers are often unknown and in danger of being trampled in the stampede to send work to India.

At the Russoft conference here on June 1, software makers based in Russia, Belarus and Ukraine sought fresh information on how to get bigger in order to claim their place in the IT sun.

Russoft is a trade association for software makers based in Russia, Ukraine and Belarus.

One of the biggest issues the Russian companies face is the need to increase in size to get noticed by big customers and make those customers feel more secure about entrusting their key IT projects to them.

But, in a chicken-and-egg conundrum, in order to get bigger, they need more customers. Some companies are solving the problem by turning to acquisitions.

The number two Russian player is Moscow-based Luxoft, with 1600 employees and $45 million in sales. The company has just completed the acquisition of ITCI (IT Consulting International), a software maker with headquarters in New York City and software development operations in Russia.

ITCI focuses on financial services work while Luxoft counts among its clients IBM, Boeing, Dell and Deutsche Bank.

The largest Russian software maker is Epam, with $57 million in annual sales and 1700 employees. The companys world headquarters is in Princeton, N.J., although its development work is done in Russia and other former Eastern Bloc countries, according to Karl Robb, executive vice president of global operations for Epam.

In an interview, he suggested that Epam could acquire companies to increase its size.

Forrester Research analyst Pascal Matzke estimated that total sales of Russian software houses in 2005 were $1 billion. In contrast, Forrester pegs the size of the Indian software industry at $24 billion and that of China at $2 billion.

The mission of Russoft is to assist all its members as a group, which shares many common advantages and disadvantages of Russia and related countries.

In Russias favor are a sound infrastructure of highways, rail and air travel and electricity. Russia also boasts a highly-educated workforce with strong abstract thinking skills.

Wages are stable and costs, outside of St. Petersburg and, especially, Moscow, are low enough to be competitive with India, said Matzke, in a presentation to Russoft attendees.

Factors that have been impeding the progress of Russian companies are restrictions on travel, weak business education, corruption among officials, lack of consideration for intellectual property and weak marketing by the software makers, according to Matzke.

Jiri Polak, a partner with Deloitte Consulting, told the Russoft audience that for Russian software companies to have global credibility, they will need to have $200 million in annual revenue.

Matzke said some market factors are playing into the hands of the Russians. The multisourcing strategies of many large outsourcing customers are creating more contracts of smaller value, and opening doors for smaller vendors, such as the Russian companies.

As vendors become larger, he suggested that a few ought to emerge as "national champions" and other smaller companies could follow in their train. The Indian market has already followed this pattern, he said.

The growth in the size of the software services market is increasing, from $48 billion in 2004 to $60 billion in 2008, said Peter Ryan, an analyst with Datamonitor in Montreal.

He told Russoft attendees the share of that market belonging to Russia and Eastern European companies will increase from 5 to 8 percent over that time.

"Russia and Eastern Europe are poised for growth," said Ryan, adding that the countries need to overcome a perception of instability and corruption. To do that, the companies must get better at communicating about themselves.

"With more marketing and better perception, there will be more investment," he said.

Matzke, Polak and Ryan agreed that Russian companies should focus on the skills in which they are strongest, while boosting their marketing efforts.

"If you differentiate with marketing and business focus, the options are unlimited," said Polak.

But Matzke said Russian companies are moving in the right direction: "Im very encouraged by what Ive seen the last few years. The rocket can take off."

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